The Thriving Pharmacist

Many pharmacies and pharmacists have been dreading 2024 due to the arriving DIR Cliff (tsunami, hangover etc). The new year brings a two very dramatic changes to the pharmacy landscape:

1. DIR fees will no longer be retroactive but will instead be reflected at the point of sale in the form of a reduction in the adjudicated amount.
2. GER (Generic Effective Rate) contract language is being eliminated in many different plans. 

DIR changes

DIR fees are essentially discounts built into the pharmacy contract with the PBM. The discounts were supposed to be based on pharmacy performance; therefore, they were calculated after the close of a period (e.g. a quarter). The discount was therefore collected up to several months after claim adjudication.

These DIR fees often represented up to 10% or more of the adjudicated drug cost — what the plan paid for the drug product, excluding any dispensing fee. These fees added up quickly, representing hundreds of thousands of dollars (about 3% of gross sales) for our pharmacies paid back to the PBM months after the product was sold.

DIR collection at the point of sale means that we are expecting to see a reduction in what we are paid for any given item in 2024 compared to 2023. This will be most noticeable for brand name drugs. 

By collecting the DIR fees at the time of adjudication, we remove the uncertainty we had before. This is a good thing. We will now know before selling the product what we are making. This is a net positive change. If we are losing money on a product in 2024, we will know immediately (not in 3 months) and can pursue the appropriate course of action.

GER, MAC and the Implications 

The GER model was created, in part, by the industry to address criticisms of the PBM’s Maximum Allowable Cost (MAC) pricing methodology. MAC pricing is proprietary–how the PBM established the price is a company secret. 

MAC pricing was added to the traditional reimbursement language as an addition. Contracts originally were written as Average Wholesale Price (AWP) – a percentage. The PBMs added the “or MAC price” later. Early on, there were a few MAC prices. Ultimately, most every drug had a MAC price.

The problem was that pharmacy may not be able to purchase the product anywhere near MAC price. While we could complain that it was too low, there was no guarantee it would ever change. MAC prices are frustrating: they are shrouded in secrecy, can and do change unexpectedly, and rarely do they reflect what pharmacies would consider a fair price. 

The GER model, instead, created an aggregate reimbursement level for a group of pharmacies. This group might comprise pharmacies in region, or a chain of pharmacies, or even a PSAO’s member pharmacies. On the surface, GER contracts were promising. You knew what you were going to get paid. The price was once again based on AWP, just like before.

The GER model usually defined the group’s reimbursement as AWP minus a percentage. While this formula is familiar, don’t get too comfortable. There is a subtle but important difference here. The GER contract does not mean that every prescription adjudicated was paid at that rate. No, the PBM might pay some items well above or below that rate, and the reimbursement might change throughout the year. The GER contract language was written to look at the whole group’s reimbursement across all prescriptions during the period. 

Using this model, thee PBM would pay you whatever it paid you. That might be a loss, or a nice profit for any given claim at any given pharmacy. At the end of the period (typically a year), the PBM would calculate all payouts across the group and compare it to the GER in the contract. If the PBM missed the aggregate target (high or low) it would “true-up” by either paying the network what it was due or collecting any overpayment.

GER contracts created significant potential for inequity amongst pharmacies within the group. This isn’t an issue if the group is a national chain, as the pharmacies maintain common ownership. The chain is guaranteed to be paid accurately across all its stores per the contract. 

Where GER is problematic is the independent space. Independent pharmacies do not share common ownership. Here, one pharmacy might end up on the very short end, with its own average claims paid well below the GER rate, while another might do exceptionally well. Where you landed depended on the blend of products that was dispensed to your patients. 

For this reason, transition of contracts away from GER is a positive for independent pharmacy. Well, sort of a positive. GER is being replaced by MAC language in the contracts. What’s old is new again!

2024

So, we enter 2024 with two significant changes. Both share one advantage: a pharmacy will know where it stands with any given claim. Immediately. The pharmacy is now able to decide what changes it needs to make to maintain its viability as a business. On the flip side, the industry has created the potential for further reductions in reimbursement to pharmacies. This race to the bottom has only hurt the public’s access to pharmacies and pharmacists. 

Next time we will look at actual numbers coming from claims in the new year and compare them to last year. We will see where the rubber meets the road. Until then, don’t forget to Make Every Encounter Count!

The target audience of this blog is independent pharmacy owners. Many, perhaps most pharmacy owners have little to no formal education in business. Most of us learned on the job. In the coming weeks we will be hitting a core concept pretty hard. Gross Margin. Before I do that I wanted to spend a few moments discussion what Gross Margin (GM) is and why is it important.

Gross Margin is a measure designed to look at the core profitability of the business. It is simple to calculate from financial statements if it isn’t already explicitly there. GM is the net profit divided by the revenue. Let’s look at an example

An auto repair shop pays its mechanics $50/hr. When that mechanic works on a car, the customer is billed $100/hr. Likewise, the business uses a simple 50% markup on selling price: something that cost the business $10 is billed to the customer at $20. Let’s look at an invoice for repairing my car:

Labor: 2.5 hours.— $250.00
Parts:
  Battery — $50
  Zip ties — $1
Total: $301.00

In this simple example, the business has $125 invested in labor and $25.50 in the parts totaling $150.50. The Gross Margin is therefore 50% ($150.50/$301.00), Why is this important? GM is important because it represents the percent of total sales that remain to pay expenses.

If you run a business you already know that it cost the repair shop more than $150.50 to repair the vehicle. There are other costs like benefits paid to the employee and overhead including the building and utilities. Most importantly, after expenses are removed, there is the most important part: profit for the owner.

A low Gross Margin means that there is less to work with to pay expenses. This in turn means that given some level of expenses, the profit also goes down. The general rule in business when it comes to Gross Margin is that higher is better, and anything less than a GM of 20% is a serious problem for the business.

The GM equation is simple. We only have two ways we can improve GM—decrease our cost of goods (what we pay for parts and labor in the above example) or raise our prices. If our GM is low and we cannot do either of those, the business only left with cutting overhead to maintain profit. Being simple means that GM is powerful, but it also means that if you don’t have control over the limited variables you are in for a rough ride.

And this is where we are with pharmacy. Pharmacies that accept insurance have only one significant lever they can manipulate their Gross Margin: cost of goods. Pharmacies generally don’t have any control over their selling price: the insurance sets that for us. If a pharmacy has a poor GM it has to purchase pharmaceuticals for less and / or cut expenses. Too low of a GM usually means that the pharmacy at risk of having to close its doors permanently.

Soon, we will take a close look at early 2024 reimbursement numbers which reflect the significant changes that have taken effect as of Jan 1 of this year. With this information, we can discuss the ramifications of pharmacy reimbursement in the new year.

Last time we discussed the added complexity of health insurance: the administrative layers involved. At the end, we made the observation that any company purchasing health insurance from an insurance company is essentially pre-paying for health care: your health care premiums will always reflect your usage. Therefore, every company with a health benefit is, in essence, self-insured.

Once you accept this reality, you quickly recognize that the convenience of having an insurance company manage your health care expenditure comes with a mark-up. If there is a markup, there are also ways we could save money by simplifying the equation.

As an employer that provides health insurance, our companies pay 50% of the health care premiums. Our employees pay the other half. If I can find a way to deliver the same benefit that we have at a lower cost, not only does the company win, but so does the employee. So let’s look at some of the ways we might achieve some savings.

Our companies run pharmacies. We complain about Pharmacy Benefit Managers underpaying us for our products, and in turn, profiting from our work. In many instances, the PBM makes more than the pharmacy does! This is now well documented.

Yet, my own companies health benefit uses a PBM to process our pharmacy claims. This is an obvious opportunity to save money: why pay a middleman when we could CARVE OUT the pharmacy benefit and run it ourselves? In fact, many larger companies have started to recognize the potential to save money by carving the pharmacy benefit out of their health insurance. As it turns out, however, this is harder than it sounds. 

The insurance companies and the PBMs have a complex relationship. This centers primarily around rebate dollars involved for putting certain (and primarily brand name) medications on formulary. These rebates enrich both the PBM and the Insurance company, and they are not necessarily passed to the insured (patient or company) as savings. For this reason, a lot of insurance companies will resist or refuse to allow you to carve out the pharmacy benefit — it is a revenue center for the insurance company. Such is the case of the insurance company we currently use. 

Hope is not lost: there ARE insurance companies that will sell insurance plans that carve out the pharmacy benefit. The primary concern, however, is maintaining a benefit that is as good or better than what we currently have, and if we are looking at switching insurance companies, perhaps we should look to replace more than just the prescription benefit.

The process of self-insurance takes advantage of some of those same extra layers described in the last blog post, replacing the insurance company with our own company. Like the insurance company, we can also leverage the health care provider networks by choosing a TPA. For the pharmacy benefit, there are transparent PBMs that can be contracted–though there are potentially even better options for the pharmacy benefit (stay tuned for thoughts on direct pharmacy contracting).

By using the TPA as a resource, you achieve the same pricing advantages the insurance company leverages. Depending on the TPA choice, you can maintain similar or identical access to the doctors, labs, hospitals, and other providers. This allows you to mirror the existing benefit almost exactly.

A small company that self-insures using a TPA can eliminate the mark-up on health care costs imposed by the insurance company. The economic cost of eliminating the insurance company is purely administrative: the company now pays providers directly, based on the negotiated prices obtained through the TPA and the affiliated health network. The employee would still pay their coinsurance or copays, as defined by the plan. The additional work of managing the benefit can be done internally or farmed out to a third party. 

Before we dive further into the details, we need to understand that there is an actual insurance component to health insurance. While most expenditures in health care are maintenance expenses and are readily estimated / predicted, there is a random, event-based, component as well. Examples include accidental injuries or the emergence of a previously unknown health concern. The unknown costs might be small, or very large. Just like life insurance or health insurance, the risk of the unknown events are low, but you must have a plan to deal with these events. The health insurance company allocates health insurance premiums to fund several contingency funds or “buckets”:

1. Expected Expenditures (the maintenance expenses–based on actual historical usage)
2. Reserve Expenses (for unanticipated healthcare expenses)
3. catastrophic reserves (traditional event based insurance)

If one wanted to self-insure their company, they would have to do the same thing: assign the premium such that you can set aside these dollars for the benefit to cover expected and reserve needs. The amounts reserved for the first two buckets can be determined by historical usage and an estimated percentage to be held in reserve. The catastrophic reserve is different. An insurance company generally covers the third bucket themselves, by aggregating risk across multiple groups and tens of thousands of their insured. A smaller company cannot do this, as it lacks the ability to aggregate risk.  Instead, a self-insured company would purchase stop-gap (catastrophic) insurance policy to cover these events. This works like a high deductible policy. The self-insured company funds the expected and reserve funds with premiums. The stop-gap policy will only pay out if expenses exceed a predetermined amount (the risk the company wants to take). The higher that number, the less expensive a stop-gap policy becomes.  

The great part of thinking about insurance in this way is that it makes it easy to identify the potential savings. If you have year with lower than anticipated expenses, you will accumulate bucket two (the reserve). If you have a worse than expected year, you increase your premiums just like the insurance company would do to help replenish the buckets. If you have a horrific year, with catastrophic events costing far more than your anticipated reserve costs, the stop-gap prevents a catastrophic loss for the company. 

It is not unusual for companies that have self-insured to quickly accumulate significant reserves. This should be no surprise: insurance companies make a profit doing this! When reserves accumulate significantly, the company has a lot of possible options: 

1. the company might decrease health insurance premiums
2. the amount (fraction) of the premium paid by the employee might be reduced
3. There might be additional benefits made available to employees
4. the company might move some of the reserves back into operations (keep in mind that excess money in the reserve funds is still the company’s money — the profit as it were, of self-insuring).

Let’s look at a graphic of what this would look like. In my case, a self-insured pharmacy, I would provide my own pharmacy services. In a general case, one could use a transparent PBM and pay a markup on pharmacy services OR use a direct contract with a local pharmacy, having the pharmacy collect the copay / coinsurance and bill the company for the balance.

Self-Insured Pharmacy providing its own pharmacy benefit Yellow arrows are claims submissions, Green arrows are payments and Blue arrows represent self-referral services.

In both cases the company, not an insurance interest, is as the center of the process. There are no unnecessary layers adding cost. The TPA simply receives the claims, processes them, and passes them back to the company to pay. The TPA charges the company an administrative fee for this service.  

A self-insured company still must define its coverage. This will often be modeled off the previous plan it replaced. Things like the deductible, co-insurance, covered and non-covered services are all defined. For those things that are not in place, there is still an opportunity to cover or not cover the request through the prior-authorization loop.

The self-insured plan does have some additional costs resulting from the administrative burden being picked up. Depending on the size of the company, and the number of insured, this may marginally decrease the potential savings. Even with the added administrative costs, the savings can be significant over time. The financial downside is kept in check by the stop-gap insurance. 

You can bet that my companies will be working hard to implement a self-insured structure for our next health-care renewal. We are not going to miss an opportunity to Make this year’s Renewal Period Encounter Count.

I promised we would delve further into health insurance, and like onions, there are lots of layers. A basic form of insurance, like Whole Life or Term Life insurance, involves a contract between the insured and the insurance company. There also exists a relationship between the insurance company and the insurance agent and possibly a relationship between the insured and the agent. That looks something like the illustration below (Green Arrows represent financial transactions, Blue Arrows represent trust / personal relationships):

Simple Insurance Relationship Graph.

As we alluded the last time, there are more layers involved in Health Insurance. Some of these layers are owned / operated by the insurance company, and others are contracted out. This type of insurance might look a something like this: (Green Arrows represent financial transactions, Blue Arrows represent trust / personal relationships. Yellow Arrows represent administrative relationships)

Typical Health Insurance Relationship Graph.

Here we add a TPA (Third Party Administrator), which may or may not be owned by the Insurance company. This company is responsible for processing medical claims. Likewise, the Pharmacy Benefit Manager (PBM) processes pharmacy claims. Both of these companies have created networks of contracted providers (hospitals, labs, doctors, pharmacies etc) that have agreed to accept negotiated price reductions for their service in exchange for inclusion in the network. The TPA and PBM pays the provider and, in turn, seeks reimbursement from the Insurance, including some form of transaction fee for its service.

The Prior Auth department or company (PA) decides what is covered and is not. They traditionally report directly to the insurance company. The TPA and PBM enforce the decisions made by the PA department.

Below the TPA and PBM is where the providers finally appear. Not only are there a lot more financial relationships (green arrows) and Administrative relationships (yellow arrows), but we have placed multiple entities between the providers and the insured.

Here is another way to look at this: the Insured is not purchasing healthcare from the providers, but instead from an insurance company. This is completely backwards! And whenever a group or company inserts itself into the equation, they will ultimately increase the costs passed on to the insured: there is no such thing as a philanthropic TPA or PBM — they are in the business to make money.

These added layers represent both increased costs, but also represent several different opportunities to providers. First, providers might find ways to directly contract with patients, or groups of patients. Concierge medical practices are a great example. A pharmacy directly contracting with an employer to provide service is another. Some pharmacies are eschewing insurance contracts completely, moving to a Cash Plus model. Direct Contracting and Cost Plus will be discussed here in the near future (stay tuned)

One other major implication of this model is recognizing that a company that pays for health insurance is in fact, self insured. They are purchasing health care from the insurance company at a mark-up (the insurance company will always make money), and if their business uses the insurance more than anticipated, the insurance company will front them the money for the expenses. When that happens, the insurance premiums will go up, and the insurance company will get their money back. This creates an opportunity to explore removing some or all of the middlemen from the equation and saving significant dollars on health care.

This final observation will be the focus of the next blog, where we look at what it takes to self-insure your business by removing some of the layers without actually changing your benefit. The result is a more streamlined benefit that saves both the employer and the employee money, Making Every Encounter with your health care insurance benefit Count.

If you have followed the topics here over the years, you will undoubtedly know that we have spent a great deal of time discussing Pharmacy Benefit Managers. Today we are going to spend a few moments discussing the larger picture: Health Insurance. To do this, we need to describe insurance first, as Health Insurance is not pure insurance.

Insurance, in the dictionary sense, is nothing more than a guarantee for compensation for a specified loss. The most common example would be Life Insurance (compensation for the loss of life). Other losses that are insurable might be damage to your home or car. You can insure a lot of things. The policy requires a premium — the price paid for the insurance, and the premium is based on the assessment of risk. Using statistics, it is possible to ascertain the likelihood of the loss based on historical data and information provided by the insured. This is a key point: Insurance is EVENT BASED.

Another key point is that insurance is entirely funded by the insured. The insurance company is in business to make money — they are not altruistic. The premiums they collect cover the expected losses paid out for the year plus additional reserves, money to pay commissions to agents, and of course profit. If a large number of claims are filed, the insurance company guarantees payment: the additional reserves are there for a reason. But after a run on the reserve funds, the premiums for the customers will go up to compensate.

Heath insurance shares some of the historical attributes of traditional insurance. For example, it would cover medical expenses from an accidental injury. But the business of health is not entirely event based. While there are events that influence the need for health care, health care in general is a maintenance function. Even the healthiest individuals, with no major events, consume health care. As our bodies mature and age, they need more and more general maintenance to keep things operational.

Health insurance, like any insurance, is a net win for the insurance company. They charge premiums based on usage of heath care. If you use more than they expect, your premium will go up. This is a key point: the covered person, family, company, or group is, essentially, self insured. They are just pre-paying for their health insurance PLUS the reserve, PLUS the profit to the insurance company. If the aforementioned covered entity uses more than anticipated (or costs simply rise), their premiums will go up to compensate the increase. The insurance company simply advanced you the money, and like a bank, you will repay them.

Now let’s reconsider healthcare insurance. If I offer healthcare as a benefit to my employees, the premiums being paid are just pre-payment for what is going to be spent. If there is extra, the insurance company does better. If we use more, my premiums go up (and the insurance company still wins). I am self-insure, but paying another company for the privilege. Why would I do this? Convenience and the status quo are the two biggest reasons. But could I use this knowledge to save my company money? The answer is a resounding YES.

In the coming weeks we will discuss the economics of taking the insurance company out the equation. More and more companies are looking to do accomplish this, and it isn’t as far-fetched as it sounds. So until next time, be sure you Make Every Encounter in your business Count!

In pharmacy, there are a few different ways that drug product is organized on the shelves. This organization is important because there are thousands of different combinations of drug and strength. Efficiently in finding the correct product on the shelf is important. The two systems that are used in our stores are alphabetizing drugs on their name (brands by brand name, generic by generic name) and having two sections, one for brand and one for generic, both alphabetized.

The brand section for oral solids at one of our stores once spanned an equal number of bays as the generic drugs. Over the years, with brands going generic and fewer new brands being released, the shelving space relegated to the brand name drugs has diminished. Significantly. Currently we have about twelve 4-foot shelves tasked to organizing our brand name medications: about a quarter of the size it was back in 2003 when I began my ownership journey.

Bulk medications, like inhalers, for example, have maintained a higher percentage of brand name product over the years. This has to do with the specialization required to create generics of these dosage forms. Here, our brand and generic products are stored side-by-side. We have about 36 feet of shelving dedicated for this section.

So, why am I describing my shelves to you? In the last months, we have made the decision to significantly cut back on our inventory of brand name medications in order to increase turns and to free up cash flow. For faster-moving products like Eliquis, we are maintaining a 2-3 day supply on the shelf. For slower moving items, we would typically have just a partial bottle or even no stock. For bulk items, the number carried is often zero.

As I pursued my shelves the other day, I was struck by how bare certain areas of the shelves were. The inhaler section, which normally was stacked 1-3 units deep and covered most of the available space was almost bare. The oral solid brand shelves were also very spare. We were approaching zero stock on most of these expensive items.

The question, therefore, is what impact is this having on the practice. And because we are approaching the end of the year, our inventory crew just happened to be scheduled for a visit. The result? Our inventory turns have improved, and are >14, and our overall inventory was down by $90,000.

This transition was not made in isolation. We have worked hard to use MedSync to ensure that patients have their medications on time. We have socialized these changes to our patients, asking them to give us a day or more notice on certain refills if they are not in MedSync. And while there are always outliers, this has worked well.

Our purchases went down for a short time as we burned through excess inventory, but now that we are back at equilibrium, we are still spending the same amount with the wholesalers. The differences are two fold: we don’t have the extra inventory on our shelves and we have more cash on hand if needed.

Given the challenging situations that have been thrust upon pharmacy, with brand name medications often being paid below our costs, this was a logical first step. If legislators don’t take action to reign in the anti-competitive practices of the pharmacy benefit managers, the next steps will be to start paring our brand offerings or shifting those prescriptions to mail order as perviously described.

Pharmacy owners need to be nimble today. Make changes quickly, responding before the crisis occurs. Make Every inventory Encounter Count.

We have discussed the problems pharmacies have been having with reimbursement for brand name medications for a few weeks now. The implication for pharmacy are significant: dropping plans with underwater reimbursement, not stocking some, or all, brand-name medications, closing their doors permanently (even after trying one or more of the of the previously mentioned solutions). A pharmacy intervention is desperately needed.

Short of the Federal Government stepping in and prohibiting some of the unfair business practices being used by Pharmacy Benefit Managers, what can be done at an individual pharmacy level to maintain patient access to pharmacies? For independent pharmacies, at least, there is one possible solution that comes from an unlikely source. Mail Order.

I can hear the whispers and buzz out there at my mention of Mail Order pharmacy as a solution to the difficulties currently being seen by independent pharmacies. I have not been drinking: hear me out. What if a pharmacy could, at the request of the patient, arrange for unprofitable brand name medications to be filled by the PBM’s mail order pharmacy while maintaining the patient’s home pharmacy for all other services? Sound Crazy? It isn’t. Let’s take a closer look at how this might be possible.

At first, you might think that losing the unprofitable prescription to mail order creates gateway for the patient to receive all their medications by Mail Order. The Mail Order pharmacies would certainly welcome that option. But what if the pharmacy managed the mail order experience for the patient on their behalf? Let’s outline what this might look like:

1. The pharmacy gets written permission from the patient to manage their mail order benefit on their behalf.
2. The pharmacy creates and manages the patient’s mail-order pharmacy account.
3. During the normal Med-Sync process at the pharmacy, the pharmacy orders the patient’s off-loaded brand medications from the Mail Order Pharmacy.
4. Depending on local pharmacy rules, the Mail Order prescriptions are either mailed to the Pharmacy (if allowed) for the patient to pick up with their other synced medications OR sent to the patient directly (if not allowed).

The concept is simple enough. While it requires a little footwork and coordination, the independent pharmacy can remain the patient care hub as before. The only difference is that the pharmacy doesn’t lose significant dollars on specific brand-name medications anymore. 

This mechanism has non-financial benefits as well. The patient maintains a pharmacy home: a place they can interact face-to-face with a pharmacist, a place where the patient’s health and medications are managed locally. If the landscape changes–say Congress re-balances the equation and pharmacies no longer lose money on brand name medications–bringing these prescriptions back to your pharmacy is simple. 

But in practice, scaling such an operation can be a challenge. Doing this for a few patients is probably manageable (and that might be all that is needed for some smaller volume stores). As the volume of the independent goes up, however, management of the workflow becomes critical. There are, however, partners that can help you manage a larger population using this strategy. 

As it turns out, we have another option. An option that may be far more palatable to the independent pharmacy owner than ultimately closing shop. Independent pharmacies have a way to continue to serve their communities. Independent pharmacies can continue to Make Every Encounter with its patients COUNT.

Today, it is possible that a pharmacy can be penalized for the mixture of patients they serve. Given the exact same contract with a PBM, a pharmacy might be paid less on average than another pharmacy solely based on the mix of plans and products billed to the PBM. These things are entirely out of the control of the pharmacy, but the consequences can have profound impacts on the financial viability of the practice. 

Today we must religiously watch our monthly reimbursement trends across all payers to see if things are changing. Let’s look at one PBM’s Plan payments made to two pharmacies in terms of brand name drug reimbursement over the course of several months this year. The biggest differences between these pharmacies are physical locations (patient populations) and the mix of different brand name drugs dispensed to their respective patients. 

We first need to level set; in case you do not already understand the complicated relationship between purchase price and contract terms. A PBM’s reimbursement contract rates with the pharmacy terms are typically written in terms of the Average Wholesale Cost (AWP) minus a percentage. The pharmacy purchases at Wholesale Acquisition Cost (WAC), which is about 17% lower than AWP. Furthermore, if a pharmacy is a good customer to its wholesale partner, it may receive additional discounts on brand name drug. As a rule, few pharmacies purchase brand name product much below AWP -21.5% to AWP -22%. This is, essentially, the break-even point on brand drugs for pharmacies.

Another thing to remember when looking at reimbursement based on percentages: higher cost items impact the pharmacy far more than lower cost products. Many generic drugs cost the pharmacy less than a dollar. Brand name medications can cost $500-$2000 and up. Being underwater by a couple of percent in the generic realm sets the pharmacy back a small amount, but in the case of a brand name medication it can easily lose the pharmacy $50-$100 or more. Given that the average profit for prescriptions is typically between $5 and $6, one loss on a brand name medication can erase any profit from 10 or more profitable generic prescriptions. 

The graphs below display reimbursement based on discount from AWP. The Y-Axis ranges from AWP -19% all the way down to AWP -27%. Remember that most pharmacies are breaking even at AWP – 21% to 22%, and losing money below that threshold. Look at these two graphs and see if you can spot similarities, trends, and difference between these two pharmacies.

Both pharmacies show a downward trend over the past several months. Pharmacy A (the TOP graph) was seeing an average loss on all brand name drugs billed to these plans in every month except July. Pharmacy B (the BOTTOM graph) was underwater on brand-name medications in every month, and their losses were also significantly worse, dropping well below AWP -27% in three of the six months shown. Their brand reimbursement for these plans was far, far below the break-even reimbursement level of AWP -22%. 

So, what is the reason for the difference between the stores? There are three pieces to this puzzle. First, this PBM, like most, has several plans, each with slightly different reimbursement rates. The pharmacy with the worst brand result (B) has some patients taking medications designated as specialty by the PBM. This 3-5% of brand-named product dispensed is being reimbursed at AWP – 27% to AWP-30%, decreasing its overall reimbursement. Second, pharmacy B has a much higher percentage (60% vs 85% of claims) of patients using one specific plan that pays, on average, significantly less than other plans offered by the PBM. Finally, the effective rate being paid across all plans is lower for one pharmacy based on the selection of brand name drugs being dispensed. 

Remember, the pharmacy has little control over any of these variables. The only things it can do, faced with this poor reimbursement are (in order off increasing severity or risk):

1. Stop stocking and dispensing specific brand medications (especially those designated as specialty).
2. Drop individual plans that reimburse poorly.
3. Stop stocking all brand medications.

These are all drastic steps: the pharmacy cannot simply refuse to fill products for one plan and fill for others as this would be a violation the contracts. In other words, whatever response the pharmacy has will have to be duplicated for all insurance plans across all PBMs.

Keep in mind that any of these choices will result in the patient having less access to their medications. If there are other pharmacies near either of these pharmacies, impacted patients will likely move all their prescriptions. This could result in the recipient pharmacy, having picked up even more patients with a poor mix of plans and products, to make the same decisions, further propagating the problem.

If the pharmacy is more geographically isolated, for example in a rural area or a city center with few or no other pharmacies, the reduction in accessibility is far more concerning. Patients could be forced to drive significant distances to a pharmacy that would accept their insurance or stock the product(s) they need.

Pharmacies are at a point where significant losses from dispensing brand name drugs are not sustainable. Most pharmacies don’t make enough revenue elsewhere to cover brand name drugs as a significant loss-leader. These hard choices are becoming more and more inevitable.

What is clear is that something must change. Stay tuned and we will discuss an alternative that may be able to allow independent pharmacies to continue to serve their patients while maintaining accessibility to brand name medications. There are no silver bullets, but make your next encounter with the Thriving Pharmacist blog count. Next time we will offer a possible solution.

I am going to date myself: My first pharmacy job, back when I was a pharmacy student in the mid 1980’s, still used a typewriter to create labels. There were computerized pharmacy systems available, but they were not ubiquitous as they are today. Comparing workflow technologies at my first pharmacy job to what I do today is a very, very stark contrast.

Technologies have made the practice of pharmacy much more robust over the years. First came electronic patent records and electronic claim submission. Then robust clinical screening tools, electronic point of sale registers, and IVR technologies. Today, we use advanced robotics and networking, allowing me to manage my stores that might be more than 2 hours away by car.

Along the way, pharmacy, and especially independent community pharmacies, have become targets on the digital front. Pharmacies collect significant amounts of personal information that are useful to identity thieves, as well as process a lot of credit card transactions. And unlike the larger chains, who have technology budgets to address these threats, smaller independent pharmacies are often not aware or prepared to thwart these threats.

Today, even large companies regularly suffer data breaches. I received two notices in the last 6 month related to my information possibly being involved in breaches with larger companies. We generally don’t hear about the smaller companies being breached, but it does happen, and the consequences are just as troublesome for both the pharmacy and their patients.

Information Technology Security is a big deal today, and generally speaking, it is beyond the expertise of most small pharmacy owners. Even if an owner is technically savvy, they probably don’t have the time to handle it AND manage the other daily aspects of operating a pharmacy. You need help. Expert help.

This can be expensive. Our company underwent a security audit awhile back. This was a real expense, but the money was well spent. While our physician and technical security was well reviewed (and we were able to shore up some small deficiencies quickly), we discovered that we lacked specific policies and procedures. Knowing your technological weaknesses, in today’s world, is important.

Security thru obscurity is not an option. If you have not invested in your network security, you are at risk. Even if you have made the investment, having a third-party validate your work is important. Like everything worth doing, Make Every Encounter Count, including those involved around your businesses security. And as always, if you have questions or need additional guidance, let us know!

Over the years, the patient base of our pharmacies has changed dramatically. When I started in pharmacy, for example, we had a significant cash business. The percentage of our business that went thru insurance was growing steadily: the number was near zero not that many years before. Then came Medicare Part D, and cash customers became rare. Today, nearly all our pharmacies’ business is submitted to a third-party payor.

Back in the 80’s and early 90’s, we kept tabs on what percentage of our business was insurance. Today, we pay more attention to which insurances are most impactful in our business.

In Iowa, for example, commercial insurance has been predominantly represented by one company, and only recently have we seen that domination fade. That means that if that payer made any changes that impacted our reimbursement, our pharmacy would be subject to real consequences. 

While commercial insurance is still heavily weighted in my state by a few primary players, diversification is beneficial: not all our eggs are in one proverbial basket, so to speak. Medicare Part D is another basket, and the total percentage of our business that Medicare Part D represents is yet another key metric we are interested in.

What makes both measurements more difficult has been the consolidation of the Pharmacy Benefit Manager (PBM) market. Today, almost all our business (both commercial and Medicare) is managed by three or four PBMs. And one or two of these represent most of our current business. 

It is more important than ever to understand which companies have heavily weighted influence over your stores. This insight shows you where you are most vulnerable to outside pressures. With this information, you can make decisions on individual prescription drug plans you might want to drop due to unprofitability. 

Teasing this information out is becoming more complicated because the PBMs have created their own buckets for plans. These buckets are described by the BIN, PCN and GROUP numbers. The combination of these variables can, and does change, year to year. Often there isn’t an easy way to identify what plan a patient is on unless you have a copy of the patient’s current card on file. 

Running a payer analysis on your store(s) is an important tool you can use to better understand your strengths and weaknesses. If your payer mix is anything like mine, you might need a hand to match BIN:PCN:GROUP combination to different types of plans (Commercial, Medicare Part D, Medicaid, etc). If you use a PSAO (Pharmacy Services Administration Organization) that works on the contracting for your store(s), they are one place to gather this information.

As always, if you need additional information or help, reach out to us. Make Every Encounter Count, even when you are counting prescriptions in each bucket!